Towards an adaptive economic development advancement

collective on geoeconomics

1st May 2024

PREAMBLE

As a Hyper-Imperialism state cannot compete efficiently in economic performance with a civilisational state in Asia, therefore, it has to persuade China to commit an economic suicide, (John Ross,  monthlyreview 20/04/24; John Ross, May 2023, peak China). However, such an U.S. geopolitical economics venture is only destabilising world economy through  deglobalisation the supply chain. It is an undeniable fact during an era when China‘s manufacturing prowess is that of a socialism efficiency economic development model , she is able to promote an alternative economic model than American capitalism which is collapsing.

Since China’s economy was opened up during the 1970s at a time when Malaysia went through its industrialisation initiative welcoming the incursion of transnational companies onto an emerging economy, it shall be interesting to compare an indigenous socialist politico-economic endeavour to adapt to changing situational environment with one attached to the capital-led IMF/World Bank advisory-allegiance process that ensued an emerging economy’s slow-paced socio-economic developmental effort which has also deteriorated through the decades.

We shall use  Kari McKern short piece as an exemplary exploration in comparative study.

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Driving the dragon: China’s adaptive policymaking

By Kari McKern

Apr 29, 2024

China’s economic policymaking over the past few decades is a fascinating example of adaptive planning and strategic foresight. From pivoting away from reliance on globalisation to emphasising domestic infrastructure and poverty alleviation, tilting towards the Belt and Road Initiative (BRI), and now focusing on “high-quality development” (simultaneously upscaling advanced manufacturing while deflating the property bubble), China has demonstrated a sophisticated capacity to recalibrate its economic policies in response to the changing global and domestic landscape.

This remarkable stack of serial achievements, each built upon the success of the last and necessarily a prerequisite for the next, warrants close analysis of the methodology behind this success.

In the wake of the 2008 financial crisis, China found its relatively low value-added, export-reliant economy vulnerable to the shock of lower demand. The crisis prompted a strategic shift towards bolstering domestic demand and reducing reliance on foreign markets. A significant element of this strategy involved huge investments in infrastructure required to build a nation-spanning high-speed rail network. With just over 300 kilometres completed by 2008, China extended the network to more than 43,000 kilometres in the following decade.

After independence gained, the Malaysian nation-state needs high-quality foreign investment to boost growth, but that requires broad reforms  (already well expressed 20-odd years ago by Olin Liu et al in an International Monetary Fund Report,  Malaysia: From Crisis to Recovery,  IMF Occasional Paper No. 207) covering everything from the education system and labour participation to its investment promotional framework that were not completely executed by succeeding ruling regimes that cemented and colluded on clientele relationship upon a rentier capitalism  platform peconomy.

Since 1997, the country had gone through four economic crises: the Asian Financial Crisis-1997, the dotcom-2002 crash and the Global Finance Crisis-2008, besides enveloped in the fourth crisis:  Covid19-2020 of an Ecological-Epidemiological-Economical calamity, but each crisis had been concentrating on saving kleptocrates’ enterprise in support of capital than caring for a rakyat2 economic wellbeing, and as such, succeeding ruling regimes had not wholesomely restructure the political economy with a strategic competitive outlook, but maintained the feudal-clientiel capitalism superstructure.

“While other countries sprinted into high-income and developed nation status,  Malaysia is jogging slowly,” said Raad, the World Bank country manager for Malaysia.

Whereas in China

But the strategy of improving transportation had larger goals in mind. It represented a new paradigm of mega-scale development and railway engineering driven by innovation in construction. The challenges overcome in connecting the diverse and often difficult terrains of the country honed the skills of Chinese construction firms in tunnelling and bridge-building. These capabilities signalled China’s transformation into a global leader in infrastructure development while stimulating domestic segments of the economy and reducing unemployment that was a direct aftermath of the global financial crunch.

By 2020, the Malaysian economy had contracted by 5.6%.

Not only has the national economy shrinks, its debt has surmountly increased concurrently :

Malaysia’s economy grew on average only 4% annually over the past decade, a marked deceleration from the 9% yearly growth from 1967 to 1997, according to a World Bank Report.

The stagnation has been analysed adequately by  Sudhdave’s and in a firesstorms paper.

Whereas, in China

The domestic success of the high-speed rail projects demonstrated a capacity to complete large-scale infrastructure projects efficiently and effectively. The Belt and Road Initiative, announced in 2013, signalled China’s intentions to deploy its infrastructure prowess on a global scale, involving hundreds of projects across Asia, Europe, and Africa. The initiative encompassed not only transportation infrastructure like railways and ports but also energy projects and telecommunications networks.

However, Malaysia economic stagnation in the country’s economic growth since the Asian Financial Crisis (AFC 1997) and the Global Financial Crisis (GFC 2008) persisted when the country decoupled from industrialisation towards a financial capitalism regime (see: Southampton’s  Lena Rethel Financialisation and the Malaysian Political Economy;  STORM, Financialization Capitalism in a Covid19 Political Economy, and firesstorms‘ Financialization of PNB Capital) where Khazanah and PNB playing primal roles, creating – instead of producing physical manufactured outputs – a high volume of monetary throughput with currency in circulation :

where the circuitry of capital induces household debts  through  a financialization  capitalism mode

It is also the wide corruption embracement during the Najib governance where the 1MDB AFFAIR  encouraged economic mismanagement and political uncertainty.

In China

By leveraging the experience and capabilities developed through its domestic infrastructure boom, Chinese firms embarked on BRI projects with a competitive edge in cost and expertise. This phase of Chinese economic strategy aimed at creating more expansive trade networks, essentially exporting the model of infrastructural development that had proved successful domestically. Furthermore, the BRI served to mitigate overcapacity issues within China by offloading excess production capabilities in steel, cement, and construction.

While the BRI continued to expand, domestic challenges such as the real estate bubble and concerns about environmental degradation prompted another strategic shift towards sustainable, high-quality development, which the Chinese government had anticipated in the “New Normal” strategy of the 2010s. China’s transition from a high-quantity to high-quality economic growth model began a decade ago. The shift was not a reactive measure but a policy-driven adjustment in response to changes in the global market. The Chinese government planned for a gradual deceleration of GDP growth from 10% to around 6%, aiming to maintain this rate before the unforeseen impact of the pandemic. This strategy marked a deliberate shift from high-speed growth to more sustainable, moderate growth rates, focusing on enhancing the quality rather than the quantity of economic expansion.

Meanwhile, in Malaysia

Succeeding ruling regimes are adamant on its ethnocratic economic thrust, clinging to political clientship under rentier capitalism whilst trying to “develop“ a national economy with an immense debt that is bloating yearly that by 2020:

Indeed, a paper published by the International Monetary Fund titled ‘Debt and Growth: Is There a Magic Threshold?’’ stated that countries with a debt-to-GDP ratio of 90 per cent and above could experience a dramatic  decline in economic growth.

We were there at 89.2%!

The primary losers under an ethnocratic-based economy means allocation of resources in any national budget is not according to means nor resting upon a national well-being agenda but racially, and non-secularly, biased, with resultant marked rise in absolute inequality  through the years:

Source: Martin Ravallion 15 April 2019

By 2020, Malaysia‘s average gross national income (GNI) per capita is estimated to reach US$11,200, still US$1,335 short of the current threshold level that defines a high-income economy. It is not surprising that  Vision 2020 is not realized  because, as Jomo expresses, the major political tendencies in Malaysia are invoking ethno-populist agendas that inevitably torn the already divided nation apart, even while vehemently claiming otherwise.

The direct beneficiaries are the Bumiputera who are the top income groups (the top 1 per cent and the 10 per cent) benefited the most from economic growth where in the top 10 per cent, the average growth rate per adult national income for Bumiputera is 5.4 per cent,  compared to 1.2 per cent for Chinese and 4.6 per cent for Indians. While the gap in the growth rate among the different ethnic groups was large in the top 10 per cent; however, it is even larger for the top 1 per cent. In the top 1 per cent, the average growth rate for Bumiputera was 8.3 per cent, which is sharp contrast to -0.5 per cent for Chinese and 3.4 per cent for Indians:

The World Bank Report has this to say:

“The bulk of inequality today can be explained by differences in socio-economic factors within ethnic groups rather than differences across groups. It is time to bring all Malaysians within the ambit of greater economic opportunity.”

In China

The transition towards high-quality development involved prioritising innovation, higher value-added industries, and green development.

The new emphasis is on developing sectors like technology and services, which are less resource-intensive and more sustainable in the long term. This shift is supported by policies that foster innovation, such as increased spending on research and development, and initiatives to enhance the technological capabilities of industries.

Strategic goals are also supported by China’s series of Five-Year Plans. These plans have consistently emphasised infrastructure development, technological advancement, and now increasingly, sustainability. The 14th Five-Year Plan, for example, places significant emphasis on innovation, green development, and the digital economy, which directly support the infrastructure and technological goals of the BRI.

Whereas in Malaysia

The loss of a global competitiveness in the electrical and electronics sector, and in manufacturing and exports more generally, has also given rise to concerns that Malaysia is deindustrialising prematurely, which has the potential to  undermine the country’s long-term growth prospects. The weaker business sentiment from the Purchasing Managers’ Index (PMI) is not that promising either as regime’s policymakers had not undertaken adequate strategic longer-pterm future planning nor during preceding years, had any tactical short-term initiatives to solidify a firmer base towards strong growth trajectory progressively.

Instead, in 1983, two-thirds of the government total expenditure were spent to operate twenty seven of the country’s largest public entities, (see Shahriza Ilyana Ramli et al in Malaysia’s New Economic Policy: Issues and Debate, American Journal of Economics, 2013).

Department of Statistics Malaysia chief Uzir Mahidin said on February 11, 2021 that Malaysia’s fourth quarter GDP fell again by 3.4 per cent – bigger than the 2.7 per cent decline in the third quarter. Overall GDP shrank by 5.6 per cent, the biggest contraction since the 1998 Asian Financial Crisis. This sliding trend was foreseen a year ago when theedgemarket Feb 5th 2020 issue publishes a Malaysian Rating Corp Bhd (MARC) report stating that the country expects to record  minus 5.6% GDP growth for 2021.

By then 4th. Dec 2020,  Fitch Ratings has already downgraded Malaysia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘BBB+’ from ‘A-‘.

In China

The secret sauce of China’s policymaking process involves several key steps.

Before formalising any major initiative, the Chinese government often employs experts from think tanks, academia, and industry to conduct extensive research and feasibility studies. This helps in shaping the policy’s objectives, mechanisms, and potential impacts.

Major policies often originate from the top leadership, with significant input from the CCP’s highest echelons, including the Politburo and its Standing Committee. President Xi Jinping personally announced and championed the BRI.

For sweeping initiatives, coordination across various government bodies is crucial. This includes ministries such as Foreign Affairs, Commerce, and others that deal with infrastructure, finance, and international cooperation.

The National Development and Reform Commission (NDRC), along with other relevant ministries, also plays a crucial role in formulating the detailed policy framework. They draft plans, guidelines, and funding mechanisms.

Once formulated, the policy is queued for approval by the CCP’s central committee and the State Council. After approval, it is officially promulgated and the implementation phase begins. This phase involves local governments, state-owned enterprises, and private sector players.

Chinese policies typically undergo periodic reviews. Feedback mechanisms are in place to monitor progress and challenges, allowing for adjustments to the policy as necessary.

The BRI, as a global infrastructure and economic development initiative, is managed with a high degree of state coordination, aiming to enhance trade routes and economic ties between Asia, Europe, and Africa, reflecting China’s strategic economic and geopolitical interests. This initiative is a prime example of China’s top-down approach to policymaking, where strategic visions set by the leadership dictate policy directions and implementation mechanisms.

Whereas in Malaysia

The history of capitalism, from the beginnings of British colonialism more than half a millennium ago to our present ruling regimes of using clientel-capitalism to colonialise the minds of the unrepresented destitutes in order to retain and sustain political power, immiserising countless rakyat2 land-settleless, and to continue impoverishing the poors in order for capitalism, specifically clientel ethnocratic capital – with political fabrication and economic entrenchment of the NEP construct (James Chin, 2016) which clearly divisive to the nation’s unity and sense of belonging (Lim Teck Ghee).

The process of national economic development continuance even after independence with the implementation of a series of neoliberal economic development programs scripted with the assistance of the Development Advisory Service of Harvard (DASH) and the “consultancy advisory ” of the IMF/World Bank neoliberalism-is-neo-imperialism twin – laid the doomed foundation to a series of capital in crisis after crises, (STORM, 01 June, 2022, ethnocapital and class; STORM, 06 June 2022, ethnocapitalism in calamity crisis).

The construction of an unequal local situations and how by linking those compradore capitalism to the global system (Samir Amin, 2019) in the past and the  clientel ethnocapitalism at present – where malay voters expect to, and rely on, patron-client relationships, nested within party machines, to benefit from distributive and development policies – we are beginning to see the transcendence of the capitalist system central to so many of our existing socio-economic problems, (see STORM 2024, A trunkful of dirty Linens).

In conclusion, China’s economic development over the past few decades has been characterised by adaptive planning, strategic foresight, and a remarkable capacity to recalibrate in response to changing global and domestic landscapes. From the pivot towards domestic infrastructure post-2008, to the global ambitions of the BRI, and now the focus on high-quality, sustainable development, China has demonstrated a sophisticated approach to economic strategy. This approach is underpinned by a centralised, top-down policymaking process that allows for the effective implementation of major initiatives. As China continues to navigate the complexities of the global economy, its ability to adapt and strategise will undoubtedly shape the planet’s economic trajectory for years to come.

Whereas in Malaysia, the Madani Economic Model has a cacophony of narratives and many a conversation that are soundly challenged (newleftmalaysia, February 2024).

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Kari McKern

Kari McKern, who lives in Sydney, is a retired career public servant and librarian and IT specialist. She has maintained a life time interest in Asian affairs and had visited Asia often, and writes here in a private capacity.

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Essays relating to the political economy of the Malaysian nation are accessible HERE1 and HERE2.

The China’s overcapacity issue – and must be forced to commit an economic suicide

Collective on Geoeconomics

24/04/24

PREAMBLE

First it was that since the U.S. cannot outcompete China, then it is not by accelerating the growth of U.S. economy but by slowing China’s.

As the U.S. could not suffocate that civilisational state in Asia, therefore, the hegemon in a Hyper-Imperialism state has to persuade China to commit an economic suicide, (John Ross, monthlyreview 20/04/24).

However, instead of devoting more attention to domestic economics in U.S., this global war machine is building military bases in a hegemonic hubris straining under multilateralism as a rogue’s in itself – and contributing to global growth problems – by disinvestment compared to China state enterprises, (see detailed exploration and elaboration in STORM April 2023), inevitably inducing China’s better socio-economic performance compared to the collapse of American capitalism with an increasing accompanying national debt crisis.

Now, unable to compete efficiently with China, the U.S. geo-political economics praxis is destabilising world economy through deglobalisation the supply chain especially with China‘s manufacturing prowess with a socialism efficiency economic development model , and to promote an alternative news campaign about China’s overcapacity as part of peaked China narrative, (John Ross, May 2023).

Here, from the pages of Philippa Jones of CHINA POLICY – a Beijing-based research and advisory company responding to China’s changing domestic policy and its geopolitical impact – we continue with

Beijing debates overcapacity

The diverging perspectives among well-known commentators Huang Yiping 黄益平 and Lù Fēng 路风 (to distinguish him from Lú Fēng 卢锋, who, just to confuse us all, also contributes to the debate). They are all colleagues at the same famously radical university.

From a campus nearby, Sun Liping 孙立平 posits that the current overcapacity prefigures the end of a ruling paradigm. It reminded me of his analysis just after the lockdowns. Our brief from 2023 ‘post lockdown realities’ highlighted Sun (one of the PRC’s economically savvy, bellwether intellectuals) and his brilliant ‘neo-dual structure’, along with his incisive diagram explaining it… a year on his theory is more convincing than ever.

The New Era sees new postures towards excess capacity

Long circulating in the media, overcapacity has become the hot-button issue in the PRC–West disaffection. US Commerce Secretary Janet Yellen’s early April 2024 visit to the PRC largely centred on it. In a meeting with German Chancellor Scholz on 16 April 2024, General Secretary Xi told Scholz that both sides should address production capacity ‘objectively’.

Yellen proposed formalising dialogue on excess industrial capacity in EVs (electric vehicles), solar panels and batteries, warning the US would not accept the ‘decimation’ of its industry. The PRC, she insisted, is simply too large to export its way to growth.

The US is not alone in its concerns. An EU probe into the PRC’s trade practices in EVs opened in EVs opened in October 2023; another, centred on wind turbines, started in April 2024. The bloc would later that month update and expand a list of sectors potentially distorted by PRC measures, including key strategic emerging industries like semiconductors and renewable energy products, opening the door for more anti-dumping investigations.

Excess capacity has been  characteristic of the PRC economy for decades. Given its move up the value-added chain, excess capacity becomes a nagging geopolitical topic. The issue is Beijing’s ability/desire to do something about it.

Beijing’s supply side

Beijing’s understanding of the ‘supply side’ clearly differs from that of mature economies. As Xi explained the ‘new development paradigm’ to a February 2023 Politburo study session, Beijing seeks to improve demand’s efficacy in guiding supply while seeing higher-quality supply drive demand. Overcapacity might then pose problems but would eventually solve itself, given ideal central policymaking.

Conflicting views on overcapacity pervade the PRC leadership. Addressing domestic audiences, the centre rails against overcapacity. It was identified as a top problem in certain sectors in both December 2023’s CEWC (Central Economic Work Conference) and the 2024 Government Work Report. Specific sectors were not identified. CEWC 2023’s economic agenda featured supply-side structural reform, a cause first flagged back in the early 2010s, when a major increase in overcapacity was last faced.

Faced with overcapacity as a part of broader rivalry with the West, officialdom strikes a different tone. Wang Wentao 王文涛 Minister of Commerce dismisses charges of overcapacity in EVs: advantage comes not from subsidies but from PRC firms’ constant innovation and supply chain improvement.

The overcapacity debate is deemed another case of the US damaging regular trade in the name of national security, explains Liao Min 廖岷 a deputy finance minister. Overcapacity simply demonstrates the price mechanism at work: prices fall as supply outstrips demand. Both should soon readjust.

Global markets must be considered. Demand for solar panels is forecast to quadruple by 2030, far beyond what current capacity can supply. The PRC simply fulfils domestic demand while contributing to the international green transition.

Overcapacity is overhyped, editorialises Xinhua. Developed states routinely seek markets for goods in which they have advantages, yet when the PRC does the same, it is deemed disruptive. Put simply, the West fears losing its monopoly position in the global division of labour and the wealth it brings. Proclaimed ‘decoupling’ is meant to subdue latecomers like the PRC, add Xinhua.

cyclical conditions

More sectors are reaching overcapacity (defined as production exceeding demand and rational output levels), estimates Lú Fēng 卢锋 Peking University National Development Institute, including

petrochemical raw materials

automobiles

above all gas-powered

batteries

microchips

NEVs (new energy vehicles)

The PRC has undergone three waves of overcapacity since reform and opening, reckons Liang Yongmei 梁泳梅 CASS Institute of Industrial Economics. These were of

• consumer goods during the late 1990s;
• certain industrial goods in some firms (particularly cement, steel and aluminium) from 2003 to 2007;
• generalised and including a wider range of industrial goods from 2010 to 2016

These cycles were closely linked to global economic performance: as demand falls, capacity utilisation drops due to falling orders and mounting stocks. But that fails to account for their stubborn recurrence. Constant PRC industry upgrades repeatedly  generate swathes of old capacity, under certain circumstances deemed ‘over’. Worsening the problem, local governments routinely help firms boost capacity to consolidate the tax base and create jobs. Overcapacity keeps showing its ugly head. Capacity utilisation in high-tech goods is for the first time falling faster than in conventional industry, laments Wu Ge 伍戈 Changjiang Securities. Even an industry leader like batteries giant CATL reaches only 70 percent capacity utilisation.

The PRC morphed from a society facing chronic scarcity to one with constant overcapacity in 1997, explains critical sociologist Sun Liping 孙立平, due to its investment-led growth model. The current manifestation may be the end of the road. Solving overcapacity is no easy matter of increasing demand. This is true of consumption above all. Investment-led growth is the raison d’etre of institutions like banks, the fiscal state and equities markets. Reforming them is intractable yet a prerequisite to solving overcapacity, as Sun cogently shows. 

growing debate

As Beijing refines its narrative, domestic debate on overcapacity grows in the gaps. Different this time, explains Lú Fēng 卢锋, is the spread of overcapacity to high-end emerging industries, not least those with lucrative global markets. Given the lack of global mechanisms to coordinate (over)capacity, industry consolidation and increased exports are to be expected.

Take care in such moments, warns Huang Yiping 黄益平 Peking University National School of Development. Developing new productive forces will entail maintaining openness with other countries, not least advanced economies. Now massive, the PRC economy can no longer export its excess capacity without punitive blowback. Policy must focus on innovation, not capacity, maintaining good relations while advancing modernisation.

Demurring, Lù Fēng 路风 Peking University School of Government (note different name) contends supply-side structural reform has cramped growth over the past decade. More industrial production is always good, driving demand for intermediate goods in a virtuous cycle essential for development. Focusing only on ‘strategic emerging’ or future industries dooms the economy to stagnation. Overcapacity concerns are, hence, misplaced at best and fatal at worst.

a dangerous moment

Adding critically to the danger, explains Sun Liping, is reentry to overcapacity, just as the world does likewise. Decoupling and reshoring efforts have generated massive investment in manufacturing in all major economies, including the US, Europe and Japan. Trade wars and protectionism now seem unavoidable.

Beijing reacts as if cornered. In early April 2024, Xi told US President Biden he would not stand by as the US kept suppressing PRC initiatives to advance its technology and economy. Measures designed to penalise overcapacity in those terms are easily grasped–irresistibly so in Beijing. Accepted as a problem, the ominous geopolitical shadow cast by overcapacity may force Beijing to alter its posture.

profiles

Huang Yiping 黄益平 | Peking University National School of Development president

For Huang, nurturing new productive forces entails maintaining openness, above all with advanced countries. Tech exchange supports total factor productivity, a hallmark of new productive forces and blessed by Xi.

Overcapacity again becomes controversial because the PRC fails to handle its causes: frequent imbalance between investment and consumption, coupled with (state-led) excessive resource allocation to certain sectors. The PRC economy’s sheer scale is new. Domestic supply and demand lose relevance: domestic changes directly impact global markets in ways that other export-oriented developmentalist states were able to avoid.

To avoid conflict, industrial policy should focus on innovation rather than capacity, with strict adherence to multilateral fora like the G20 and rebalancing the economy towards consumption.

Holding an economics PhD from the Australian National University, macro policy heavyweight Huang divides his working life between scholarship, the private sector and government. His experience includes Columbia University, CitiGroup, Caixin Media Group, PBoC’s monetary policy committee and the China Finance 40 Forum. He replaced Yao Yang 姚洋 as head of Peking University’s National School of Development in early 2024.

Lu Feng 路风 | Peking University School of Government

Obliquely challenging the pressure to de-capacitise, Lu insists overcapacity is overhyped, a manifestation of anxiety about rivalry with US economic power. Supply-side structural reform has indeed cramped development over the past decade. Becoming wealthier and raising living standards entails producing more, regardless of demand from moment to moment.

Take steel as an example, says Lu: production was capped centrally in 2016. Yet, a bare decade later, domestic demand far exceeds the cap: those limits were, this implies, pointless in the first place.

Feng warns that the focus on innovation must not be too narrow. Intermediate goods must indeed have greater scale than strategic emerging industries: their economic contribution is not to be underrated. Large traditional industries are needed to create vaunted ‘future industries’: new tech applications emerge only when experts in existing sectors create them. 

After graduating from China Minzu (’Minorities’) University in 1982, Lu worked in state agencies. He took a PhD in Political Science from Columbia University from 1991 to 1998 and completed a postdoc at Berkeley. He returned to teach at Tsinghua University in 1999. He later directed the Enterprise and Government Research Institute in the School of Public Management, moving to Peking University in 2003.

Sun Liping 孙立平 | Tsinghua University Department of Sociology professorThe era of large-scale concentrated consumption experienced previously is basically over, said Sun in a speech on 14 April 2024. The PRC economy is in a period of contraction, and the consumer sector too is at a turning point. In conventional consumption’s current stage of gradually dividing, he said, ‘the poor cannot afford, the middle class does not dare, and the rich do not know what to consume’ has become a common impression. Given differentiating consumption, and the background of economic contraction, consumption of society as a whole faces a downward trend. Overcapacity is just a manifestation of this reality.Born in a Hebei village in 1959, Sun studied journalism at Peking University 1978–81, taking up sociology at Nankai University 1981–83. A journalist for some years, he joined Tsinghua University in 1993. He famously helped advise a younger Xi Jinping’s PhD dissertation, the resulting political capital arguably allowing him to test the limits of intellectual expression. His bestselling 1996 book, The Road to Modernisation, argued that politics had been outpaced by economic growth, brewing corruption, inequity, and unrest. With over 300 other intellectuals, Sun co-signed the ‘Charter 08’ open letter to the Party, urging political reform. He warned Caijing Magazine’s annual Forecasting and Strategy conference in 2013 of a ‘crisis of legitimacy.’ Widely reported, this caused a stir. Other notable works include Social Reconstruction (2009), China’s Political Reform (2011), and Crisis of Legitimacy (2013).

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RELATED REFERENCES

How China Works

China’s Future Industries

China’s Foreign Direct Investment

Global growth economy under the calamity of capitalism

collated by, and collaborated with, the Collective of Geoeconomics

18/04/24

INTRODUCTION

The world economy is confronting a situational environment where the Middle East North Africa (MENA) region and the Ukrainian cross-border conflicts continuance are serving a sobering reality of geopolitical dimensions affecting geoeconomics realities. The escalation of tension in the Middle East combined with growing instability about Ukraine demonstrates once again how significant geopolitical decisions impact upon geoeconomics policies under calamity of capitalism regime. 

The global growth rate — if one takes out the cyclical ups and downs — has slowed steadily since the 2008-09 global financial crisis (GFC’08). However, it is concurred that without policy intervention and leveraging emerging technologies, the stronger growth rates of the past are more unlikely to return.

It can also be fairly stated that shrouded with several headwinds, future growth prospects are where capitalism is shoved into a calamity mode. Global growth will slow to just above 3 percent by 2029, according to five-year ahead projections in an IMF latest World Economic Outlook.  The IMF analysis  shows that growth could drop by about a percentage point below the pre-pandemic (2000-19) average by the end of the decade. This threatens to reverse improvements to living standards, and the unevenness of the slowdown between richer and poorer nations could limit the prospects for global income convergence.

Indeed, the latest IMF forecast for global growth five years from now – at 3.1 percent –is at its lowest in decades. The pace of convergence toward higher living standards for middle- and lower-income countries has slowed, implying a persistence in global economic disparities. …dimmer prospects for growth in China and other large emerging market economies, given their increasing share of the global economy, will weigh on the prospects of trading partners.

A persistent low-growth scenario, combined with high interest rates, could more likely than ever insert debt sustainability at risk whereby restricting the government’s capacity to counter economic slowdowns and invest in social welfare or environmental initiatives.

Further, there are indications in the expectations of a weaker growth rate that would- and could – discourage more investment in capital and technologies, possibly even deepening a capitalism slowdown.

All this is accentuated, and exacerbated, by strong headwinds from geoeconomic fragmentation, and harmful unilateral trade and industrial policies.

Here, the Collective on Geoeconomics (CoG) asserts that in the last two decades of the twentieth century, the world has witnessed the development and expansion of commercial, productive, and financial globalisation. This new phase in the world economy was marked by increased trade in goods and services, greater international participation in the productive operations of transnational companies, and the intense circulation of capital at the international level in a new dynamic of world capitalism. Faced with the demands of financial capital – the dynamic centre of this new stage of capitalism – countries have increased the extent to which they have opened their economies externally and deregulated their markets, reducing state participation in the economy in pursuit of the ideal of a ‘minimal state’ – despite the unsatisfied basic needs of a huge portion of the population. Neoliberal policies have been implemented in many countries. These policies seek to dismantle both the welfare state in Europe and the few advances that have been made in Latin America towards enshrining democracy and the rule of law in the constitution and are presented as necessary conditions for economic development and overcoming ‘underdevelopment’.

Public Intellectuals like Dadabhai Naoroji and Sayyid Jamaluddin al-Afghani had rejected the Western imperialism regime of expropriation. They criticised how parts of the global South were being transformed – and ruined – by Western imperialism.

Consolidated to the imperialism premise is the super-exploitation of labour as developed by a group of economists – professors Ruy Mauro Marini, Theotônio dos Santos, Vânia Bambirra, Luiz Fernando Victor, Teodoro Lamounier, Albertino Rodriguez, and Perseu Abramo using and applying Marxist methodology. They define super-exploitation of labour as to the intensified exploitation of the workforce, resulting in an extraction of surplus value that exceeds the limits historically established in core countries. This becomes a fundamental feature of the capitalist system in underdeveloped economies, since foreign capital and local ruling classes benefit from workers’ low wages and precarious working conditions as well as the absence of labour rights, thus maximising their profits and capital accumulation to the intensified exploitation of the workforce, resulting in an extraction of surplus value that exceeds the limits historically established in core countries. This becomes a fundamental feature of the capitalist system in underdeveloped economies, since foreign capital and local ruling classes benefit from workers’ low wages and precarious working conditions as well as the absence of labour rights, thus maximising their profits and capital accumulation

From this perspective of the combined and unequal development of capitalist accumulation in its globalised totality, one begins to understand that the phenomenon of underdevelopment grips the dependent economy. Thus, a relationship of dependence is created and fed by the development of capitalist industry, which transforms some countries supplying raw materials into receptacles of wealth that drain into the industrialised core. The super-exploitation of the workforce is necessary for this drainage to be sustained, which exposes the real process of the production and reproduction of capital in Latin American countries during an era of neo-imperialism.

TOTAL PRODUCTIVITY FACTORS

There are a variety of policies — from improving labour and capital allocation across firms to tackling labour shortages caused by aging populations in major economies —could collectively rekindle medium-term growth.

The key drivers of such capitalism economic growth parameter include labour, capital, and how efficiently these two resources are used, a concept known as the total factor productivity (TFP). Between these three factors, more than half of the growth decline since the crisis was driven by a deceleration in TFP growth. TFP increases with technological advances and improved resource allocation, allowing labour and capital to move toward more productive firms.

Then, resource allocation is also another critical element in capital growth factor. Yet, in recent years, increasingly inefficient distribution of resources across firms has dragged down TFP and, with it, global growth.

It is understood that much of this rising misallocation stems from persistent barriers, such as policies that favour or penalize some firms irrespective of their productivity, that prevent capital and labour from reaching the most productive companies. This limits their growth potential. It is stated by IMF if resource misallocation has had not worsened, TFP growth could have been 50 percent higher and the deceleration in growth would have been less severe.

With due concern, there are two other factors that have also slowed growth. Demographic pressures in major economies, where the proportion of working-age population is shrinking, have weighed on labour growth. Meanwhile, weakening business investment has stunted capital formation, and its accompanying capital accumulation impulse.

CoG asserts that it is not population pressure per se in the emerging economies but the exploitation of labour thereon that creates the dependency development patterns which encourages capital to skew towards preferred industry – and firms – in maximal capital accumulation in allegiance to local compradore capital as part of the rentier capitalism scene, (STORM 2021, inequality and ethnocratic hegemony).

In a country case like Malaysia where advocacy of IT promotion by the World Bank is being monopoly-financed by Global North information technology platforms by deepening infrastructural platforms stronghold ,(STORM April 2023) where even the maintenance of fibre optics conduits and routers is dominated by monopoly capital (STORM January 2023, marine cabotage under netarchical capitalism).

The country’s Industry 4.0 initiative is typically maintained by ethnocapital-ethnocratic-clientel-capitalism that neglects the small manufacturing enterprises (SMEs) in the overall industrialisation processes, (STORM June 2023). There is much to discourage this mode of industrial policy arrangement where digital labour is short-circuited, (STORM, March 2023).

Thus, dependent capitalism is defined, first, by the transfer of value from the periphery to the core as a structural dynamic; second, by the super-exploitation of labour as compensatory for the local bourgeoisie; and, third, by a particular type of reproduction of capital in which production and consumption are separated; an expanded elaboration in STORM 2023, foreign capital and social struggles.

ON MID-TERM SITUATIONS

According to United Nations projections, it is accepted that demographic pressures are set to increase in most of the major economies thereby causing an imbalance in world labour supply and therefore moderating global growth. The working-age population will increase in low-income and some emerging economies, whereas China and most advanced economies (excluding the United States) will face a labour squeeze. By 2030, it is expected that the growth rate of the global laboir supply to slide to just 0.3 percent — a fraction of its pre-pandemic average.

Some resource misallocation may correct itself over time, as labour and capital gravitate toward more productive firms. This will go some way toward mitigating the TFP slowdown even as structural and policy barriers may continue to slow the process. Technological innovation may also lessen the slowdown.

As situations stand, it is forseen that overall the pace of TFP growth is likely to continue to decline, driven by challenges such as the increasing difficulty of coming up with technological breakthroughs, stagnation in educational attainment, and a slower process by which less developed economies can catch up with their more developed peers.

It is expected that absent of more major technological advances or structural reforms, the global economic growth can only achieve 2.8 percent by 2030, well below the historical average of 3.8 percent.

OF IMMEDIATE CONCERNS

Here are some concerning issues – pertaining to the oil and gas industry – with the threatening MENA geopolotical crisis that affect global economy under the strand of calamity in capitalism, as extracted from Professor Adam Tooze’s Chartbook #275:

1. Oil is still flowing. Straits of Hormuz supply 18 million b/d of oil flows through the Persian Gulf – c. 18% of global demand. Unlike the Red Sea, there are no alternative routes. If this is at risk in any serious way, the impact on oil markets will be dramatically chaotic.
2. Risk of major disruption has clearly increased, but this likely be reflected in options market most directly.
3. China’s demand growth is widely expected to slow this year after an exceptionally strong 2023 as post-Covid travel subsides and its economy slows, but Chinese petrochemicals demand remains robust, though both India and the Middle East will support such demand.
4. OPEC+ has been keeping supply tight, but since April there have been signs that they are likely to agree to increase supply at a June 1 meeting. It may choose to keep market guessing by calling monthly meetings and slowly increasing the price of oil.
5. There is still plenty of spare capacity with Saudi, Emirates and Iraq keeping 5 m barrels per day off global market = 5% of world demand and more than what Iran is producing. It is assured that only an actual military interruption to Gulf flow shall in some ways to threaten a serious shortage.

6. Then, there is the US (SPR) Strategic Petroleum Reserve (half its former level) but still enough to move the market.

As the Dallas Fed analysis shows, measured relative to the IEA standard of net imports, the US Strategic Petroleum Reserve is more than adequate to support its capitalist economy because the US is now a major net exporter of oil. 

GLOBAL GROWTH REVIVAL

The IMF analysis further evaluates the impact of policies on labour supply and resource allocation, set against the backdrop of the rapid advance of artificial intelligence, public debt overhang, and geoeconomic fragmentation, (exemplified by country case studies in STORM January 2024, STORM April 2024, STORM June 2023, respectively).

Through examining scenarios featuring ambitious, but achievable, policy shifts that address resource misallocation – it is by improving the flexibility of product and labour markets, trade openness, and financial development. The IMF team also consider policies aimed at enhancing labour supply or productivity by reforming retirement and unemployment benefits, supporting childcare, expanding re-training and re-skilling programs, and improving integration of migrant workers, as well as the removal of social and gender barriers.

Their findings indicate that the benefits of increasing labour force participation, integrating more migrant workers into advanced economies, and optimizing talent allocation in emerging markets are comparatively modest.

By contrast, reforms that enhance productivity and fully leverage AI are key for reviving growth in the medium term. The analysed findings suggest that focused policy actions to enhance market competition, trade openness, financial access, and labor market flexibility could lift global growth by about 1.2 percentage points by 2030. The potential of AI to boost labor productivity is uncertain but potentially substantial as well, possibly adding up to 0.8 percentage points to global growth, depending on its adoption and impact on the workforce.

In the long run,  innovation-driven policies will be crucial to sustaining global growth.

CoG is of the opinions that innovative policies may not be able to sustain developing economies because the appreciation of the US dollar has immense impact upon these affected countries, that is, a strong dollar is bad for the global economy.

The currencies of G20 countries are almost all depreciating against the dollar. The decline since the beginning of the year has reached 8% for the yen and 5.5% for the South Korean won, led by the Turkish lira at 8.8%. Both developed and emerging economies have seen currencies weaken at an accelerating pace, with the Australian dollar, Canadian dollar, and euro falling 4.4%, 3.3%, and 2.8%, respectively, in developed economies.

Governments are increasingly concerned about the falling value of their currencies. Emerging economies are particularly sensitive to the negative effect, as the burden of dollar-denominated debt increases along with larger interest expenses due to higher rates.

Several countries have already begun to take actions. On April 1, Brazil’s central bank intervened in the foreign exchange market for the first time since President Luiz Inacio Lula da Silva took office. Although the government and the central bank have not clearly explained their intentions, some in the market believe that the purpose is to correct the depreciation of the real.

Several local media outlets report that Bank Indonesia also decided to intervene in the currency market this month. The objective is to correct the level of the rupiah, which is at a four-year low. But the rupiah has been on a downward trend since those reports, falling beyond the milestone level of 16,000 rupiah to the dollar. According to Reuters, Bank Indonesia Gov. Perry Warjiyo made a statement at the end of January that was intended to check the currency’s depreciation. The central bank has taken steps to intervene, but they have not been fully effective. Indeed, by mid-April 2024, the rupiah tumbled to its weakest
in four years as the market reopened after the Eid al-Fitr holidays, prompting the
central bank to intervene in the market to stem its slide.
The rupiah has declined as much as 2.27% to 16,200 per US dollar, its weakest level since early April 2020, leading the losses among emerging Asia currencies, (theedge ceo briefing, 17/4/24).

Turkey’s central bank raised its policy rate by 5% to 50% in March in response to the lira’s depreciation and accelerating inflation. …  “We are feeling a bit more hawkish than before,” Eli Remolona, the Philippine central bank governor, said recently, citing the higher risk of inflation.

These concerns are not just limited to developing economies, Japan and other developed countries are nervous about the incessant depreciation of their currencies.

While the Malaysian prime minister talks about “de-dollarization”, the Ringgit would hit RM5 before such measure could see any meaningful results. Those who argued that a weak currency is good for exporters have forgotten that it equally impacts imports – hence the cost of living had skyrocketed. To add salt to the wound, exporters and corporations are holding foreign reserves in dollar, refusing to convert it back to Ringgit, ( see STORM, March 2024, on depreciating ringgit).

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This essay is based on Chapter 3 of the World Economic Outlook, “Slowdown in Global Medium-Term Growth: What Will it Take to Turn the Tide?”, reflecting the research by Chiara Maggi, Cedric Okou, Alexandre B. Sollaci, and Robert Zymek; supplemented with additional datasets and extra information contents by the Collective of Geoeconomics team.

China’s growth strategy in the next industrial revolution

10/04/24

Political economists Radhika Desai (Professor, University of Manitoba; Director, Geopolitical Economy Research Group) and Michael Hudson (Distinguished Research Professor of Economics at University of Missouri) are joined by Beijing-based scholar Mick Dunford – who is the Professor Emeritus of Geography at Sussex University, and now working at the Chinese Academy of Sciences – to discuss China’s economy and debunk Western media myths, addressing accusations that consumption is too low, fears of “Japanification”, the role of exports, and the new Chinese growth strategy.

We shall summarise the discussion (scheer post and YouTube) by utilising their presented illustrated graphics.

1. That China remains an upper middle income country where the average levels of consumption are less than those in economically much, much richer countries.

And that the decline in the share of household consumption expenditure has occurred as GDP has increased at astonishing rates. Therefore, the actual real value of consumption in China has increased enormously over the course of time, and it continues to increase at this present point in time. It is a country which has 400 million people who are in the middle income categories with an enormous market potentialities.

A supplementary graph shall be this:

2. Poverty Alleviation in the Contiguous Destitute Area

In these places, there were 80 million people whose income was less than US$1.96 per day, but, between 2013 and 2020, every single one of these people were lifted above the poverty line and often lifted well above it through an extraordinary program of poverty alleviation.

3. Gross Fixed Capital Formation

And, that China has grown essentially by increasing the share of investment in its GDP.

If you invest, you employ people; the people who are employed receive wages whereby they are used to purchase goods and services. So, investment actually also gets translated into an increased consumption pattern.

4. Industrial Manufacturing “Value-Added”

The Australian Strategic Policy Institute has documented that China’s global lead extends to 37 out of 44 technologies covering technological fields like defense, space, robotics, energy, environment, biotechnology, artificial intelligence, advanced materials, and quantum technology.

China is undergoing this current process of structural change designed to significantly upgrade existing industries, basically to use new technologies in order to upgrade and improve the quality of these industries.

The next chart plots world GDP growth from the middle of the 1960s and world export growth. What it shows very, very clearly is that the growth rate of China’s world exports (real growth) considerably exceeded the rate of growth of world GDP.

5. Export Growth

China’s exports grew at something like 18.1% per year up until the financial crisis over a period of nearly 30 years which are absolutely astonishing. Then with the 2008 financial crisis, exports dropped to 9.4%. Since 2013, China’s exports have grown at 5.7%.

In the case of China, this change in the global situation obviously is one of the reasons for China’s somewhat slower growth, but China’s rate of growth is still consistent with its long term objectives in relation to increasing GDP, and GDP per head, by 2035.

6. China’s position in World GDP and Export Growth

China’s growth, the market stimulus for China’s growth is increasingly coming from China’s own economy. Similarly, this parameter goes for the import of intermediate inputs. China is importing fewer intermediate inputs which means that firms within China are increasingly producing the inputs that were previously being imported into China. So, in that sense, growth in China and also in the rest of the developing world, though to a lesser extent, is becoming less reliant on trade growth.

7. Gross Exports as share of GDP.

This red line shows China, gross exports as a share of gross output or GDP from 1995 to 2017. One can see that this is the developing countries excluding China:

China is importing fewer intermediate inputs, which means that firms within China are increasingly producing the inputs that were previously being imported into China. The growth in China, and also in the rest of the developing world, is becoming less reliant on trade growth.

8. Export-linked manufacturing as a percentage of manufacturing

Export-linked manufacturing peaked for China in about 2006; since then it has declined. The domestic sales of China’s manufactured goods is growing faster than export sales.

9. China’s Domestic Market

China’s domestic market is going to be a significant focus of future growth.

Germany’s BMW has moved its production to China. China is not importing chemicals from Germany because BASF has moved its chemical operations to China. There is a movement of Germany into China, and much of the increase and the decrease in world trade relative to GDP, which means domestic self-reliance, is a result of China’s role itself.

For the Belt and Road Initiative and implementation processes, it is to make them independent of the US and NATO countries because the US and NATO countries do not want more trade with China. The World Trade Organization is really coming to an end.

10. Global South Economies

China is the main trade partner of 140 countries in the world that are largely part of the Global South. In the recent neoliberal era-pandemic period-globalisation fractionalised situation, the Global South economies have actually grown relatively slower. That’s one of the reasons for this relatively slow growth of China’s world trade recently that has come to depend more on these emerging and low-income countries.

A supplementary graph on China Exports to selective major Global South trading partners:

However, South-South trade is going to grow very substantially. China has a very strong commitment to the maintenance of an open world economy, and in the establishment of complementary relationships.

In the longer term, the export market will continue to play a really very significant role in China’s growth. This will be much more connected with the development of other parts of the Global South.

A supplementary graph on China Exports to Global South vs US + Europe:

11. Uptake of productivity by increasing investment

The really important things about what is happening in China now is that it is talking about a new path of modernization that is different from the path that was followed by the Western world, and it involves many dimensions.

Obviously, it involves emphasis upon productivity increasing technologies; what drives growth is actually the rapid diffusion of technology. The rapid diffusion of technology depends on investment. So investment in a sense leads to rapid uptake of productivity thereby increasing investment in a circular pattern.

12. Socialism with Chinese characteristics

Chinese thought is obviously a synthesis of Marxism, but also with earlier Chinese traditions.

If one looks at Chinese ideas about international relations, the core concept is harmony. Actually, it is the idea of harmony and living in harmonious relationships with others, which means understanding the kind of internal dynamic of others and then working with them to develop their potentialities, rather than imposing upon nation-states.

The core concepts in Chinese international relations are things like guānxi (关系), or “relationality”; or gòngshēng (共生), which means symbiosis; or tiānxià (天下), or “all under heaven”.

China looks at the whole economy by looking at growth of the whole society as an organism. One is talking about transformation whereby transformation and redistribution is much more important than growth, (World Bank, 2022); the World Bank and DRC have identified the whole-of-government and whole-of-society approach.

EPILOGUE

Based on domestic great circulation, we will coordinate and promote the construction of a strong domestic market and the construction of a trade powerhouse (贸易强国), form a powerful gravitational field to attract global resources and factors of production, promote the coordinated development of domestic and foreign demand, imports and exports, and the introduction of foreign capital and foreign investment, and accelerate the cultivation of new advantages to be used in international cooperation and competition. China’s 14th Five Year Plan: Article XIII – Promoting domestic-international dual circulation.

Article 13 of this policy refers to promoting a domestic-international dual circulation. Based on domestic great circulation, the country will coordinate and promote the construction of a strong domestic market and the construction of a trade powerhouse. Therefore, both domestic market and foreign market are important to form a powerful gravitational field to attract global resources and factors of production, promote the coordinated development of domestic and foreign demand, imports and exports, and the introduction of foreign capital and foreign investment, and accelerate the cultivation of new advantages to be used in international cooperation and competition.

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collated and compiled by the Collective on Geoeconomics

12/04/24

INTRODUCTION

KS Jomo and Ngongo have expressed that since the 2008 global financial crisis, developing nations have to borrow massively from private finance – at exorbitant interest rates – to scale funding up ‘from billions to trillions’. Indeed, servicing external debt now blocks progress whereby governments have cut back spending in line with conditions or advice from powerful foreign economic agencies as such. Onset with the global debt crisis in 1979 the transition and developing Global South economies had paid cumulative US$7.673 trillion in external debt service, see Paulo Nakatani and Rémy Herrera.

In fact, the external debts of developing and transition countries reached 29% of their GDP in 2019. The short-term debts rose to more than one-quarter of the total external debts alone.

The Global South debt even then during the same period has increased from US$618 billion in 1980 to US$3.150 trillion in 2006, according to figures published by the International Monetary Fund (IMF). The external debt of this group of countries, comprising 145 member states, will continue to grow throughout 2007, according to the IMF, to more than US$3.350 trillion. The debt of the Asian developing countries alone could rise to US$955 billion, even though they have already repaid, in interest and capital, far more than the original amount due in 1980!

Malaysia 2019 external debt was RM$231225.9 million, (Asia Development Bank, External Debt Outstanding in Asia and the Pacific, Asian Development Outlook, April 2020).

According to a report to the Asian Development Bank, in September 2020, by Donghyun Park, Arief Ramayandi, Shu Tian  stating inter alia that borrowing heavily for fiscal stimulus packages to support growth and provide relief for vulnerable groups whilst at the same time, private companies and households may be forced to borrow more to survive the economic impact of COVID-19…..In addition, the economic downturn challenges their capacity to service their existing debts. Therefore, despite widespread concerns about the current escalation of public debt and its sustainability, we should not lose sight of the potential risk from possible surges of private debt…..

Coupled with a weakening economy, already, as late as July 2023, a IMF Report has projected that under its baseline forecast, growth will slow from last year’s 3.5 percent to 3 percent this year and next – a 0.2 percentage points. Our MIDF Research data have maintained its forecast that Malaysia’s GDP growth would moderate at 4.2% in 2023 (2022: 8.7%), weighed down by uninspiring external trade performance as real export of goods is predicted to contract by 2.8% (2022: +11.1), reflecting weakness in regional and global demand.

Furthermore, the national household debt-to-Gross Domestic Product (GDP) ratio had already surged to a new peak of 93.3% as at December 2020 from its previous record high of 87.5% in June 2020, according to Bank Negara Malaysia (BNM).

Malaysia National Government Debt reached 255.4 USD bn in Dec 2023, compared with 246.4 USD bn in the previous quarter. Malaysia Government debt accounted for 64.3 % of the country’s Nominal GDP in Dec 2023, compared with the ratio of 63.8 % in the previous quarter; see csloh, Destined to Debts.

We shall define the Global debt as borrowing by governments, businesses and people. Presently, it is at dangerously high levels. In 2021, global debt reached a record US$303 trillion, a further jump from what was record global debt in 2020 of US$226 trillion, as reported by the International Monetary Fund (IMF) in its Global Debt Database,21 Dec 2023.

The IMF Advisory

The IMF must do more to support low-income countries and fragile states, Managing Director  Kristalina Georgieva  said on Tuesday at the Center for Global Development (CGD).

Speaking with Masood Ahmed, CGD President, Georgieva called for the Fund to be more representative of the global economy, with a better balance between advanced economies and the voices of emerging and developing countries. She also expressed the need to help countries build resilience to a more shock-prone world.

Georgieva said she sees two equally important tasks for the Fund: “To ensure that we have the financial capacity to operate, and support vulnerable middle-income countries and low-income countries……And to bring our membership together….Despite all the difficulties in cooperation, we will work towards consensus on those issues on which the future of our children and grandchildren  depend,” Georgieva said. She also explained the IMF’s role in its work on climate.

During a subsequent conversation with World Bank Group President Ajay Banga at an event on support for low-income countries, Georgieva shared more of the Fund’s thinking. For low-income countries to reduce vulnerabilities and achieve a sustainable and meaningful rise in income levels quickly, it will take the countries themselves to do more to build the strength of their economies, and the international community to be a reliable partner, she said.

“We see that those [countries] that are doing better are countries with strong institutions, rule of law, transparency, and less corruption, and building those strengths is something no one but the countries can take on.”

Managing The Debts

• An IMF Blog

Hidden Debt Hurts Economies. Better Disclosure Laws Can Help Ease the Pain. 

Alissa Ashcroft, Karla Vasquez, Rhoda Weeks-Brown

Domestic laws need updating to ensure that public obligations are transparent

April 2, 2024

If efforts to address record global public debt are to leave no stone unturned, then weak disclosure laws warrant deep scrutiny. Hidden debt is borrowing for which a government is liable, but which is not disclosed to its citizens or to other creditors. And while this debt—by its nature—is often kept off the official government balance-sheet, it is very real, reaching $1 trillion globally by some estimates.

While these undisclosed obligations are not large when compared to global public debt topping $91 trillion, they pose a growing threat to low-income countries, already highly in debt with annual refinancing needs that have tripled in recent years. The problem is even more pressing amid higher interest rates and weaker economic growth. Accountability, too, is imperiled without accurate information about the extent of borrowing, which heightens the risk of corruption.

These potentially dire consequences can be avoided by strengthening domestic legal frameworks. Our new paper, The Legal Foundations of Public Debt Transparency: Aligning the Law with Good Practices, presents findings from a survey of 60 countries that examined vulnerabilities and loopholes in national laws that hinder transparency.

Building on a July 2023 paper, our new research shows that fewer than half the countries surveyed have laws that require debt management and fiscal reports, while less than a quarter require disclosure of loan-level information—key legal features for facilitating transparency. We also identify four noteworthy vulnerabilities in domestic laws that enable debt to be hidden: a narrow definition of public debt, inadequate legal requirements for disclosure, confidentiality clauses in public debt contracts, and ineffective oversight.

Definition

In many countries, a narrow definition of public debt, in one or in multiple laws, permits some forms of sovereign debt to escape oversight. We recommend that the definition of public debt be broad and comprehensive, meaning that it should capture arrears, derivatives and swaps, suppliers’ credit, and assumptions of guarantees as well as loans and securities. The definition should also cover extra budgetary funds, public trust funds (pension funds, for example), and special purpose vehicles.

A good example is found in Ecuador, which pursued legal reform in 2020 to ensure that short-term financing instruments—such as securities or treasury paper with terms of less than one year—were included in debt calculations and statistics. Other good examples include the legal definitions used in Ghana, Jamaica, Rwanda, Thailand and Vietnam, all of which encompass multiple types of debt instruments.

Disclosure

Second, across the globe, legal requirements for debt disclosure are inadequate. A strong legal basis is crucial to signal that there is a clear requirement to report debt data in a manner that is both timely and relevant for policy analysis, transparency and accountability. Strong reporting laws are found in in Benin, Kenya and Rwanda, which define both public debt reporting requirements and the timeframes for these reports.

Confidentiality

Confidentiality in public debt contracts directly hinders transparency. Across the globe, few laws regulate (and limit) the confidentiality of public debt, which hands policymakers wide discretion to label such contracts confidential for national security or other reasons. This is exacerbated by the fact that current debt-related international standards and guidelines provide limited guidance on how to tackle confidentiality issues.

We recommend that the law tightly define exceptions to disclosure and the scope of confidentiality agreements. Legislative oversight and other safeguard mechanisms such as administrative or judicial remedies should also be spelled out in the applicable legal provisions. Laws in Japan, Moldova and Poland are among the few that authorize legislative or parliamentary oversight of confidential information.

Oversight

The disclosure of public debt may also be inhibited where there is ineffective oversight governance by legislatures and supreme audit institutions (national government audit institutions), which are all important guarantors of accountability. Legislative bodies must be able to monitor and scrutinize public debt on behalf of the people, and they need to have staff able to read and grasp highly technical reports.

Several legislatures have a committee system—such as committees on the budget and public accounts—which allows for specialization among legislators. An example is in the United States, where the Treasury Secretary is required by law to send the annual public debt report not to Congress as a whole, but to two specific committees—House Ways and Means and Senate Finance. We also recommend that laws provide supreme audit institutions with the authority and the necessary powers to monitor and audit government debt and debt operations.

IMF role

Debt transparency not only benefits countries directly, but it is also essential for the work of the IMF. Hidden and otherwise opaque forms of debt make it more difficult for the Fund to fulfill its core mandate in a number of ways. For example, collateralized loans, novel and complex forms of financing, and confidentiality agreements make it difficult for the IMF to accurately assess a country’s debt and help bring its economy back on track.

Thus, the Fund works to bring the benefits of debt transparency to countries directly through technical assistance and also addresses the issue in our program engagements.

Well-designed laws make it harder to hide debt. But there are not enough of these laws on the books, despite their demonstrated benefits. Given the critical importance of getting transparency right, countries and their international partners must push for reforms to improve domestic legal frameworks, which in turn benefits both borrowers, legitimate creditors, and the system more broadly. Turning stones has never been more important.

— Kika Alex-Okoh contributed to this blog.

ADDENDUM

By way of confronting China with the peak paradigm by dispelling “Peak China” myths and affirming China’s development trajectory (john ross; Habib al Badawi; the diplomat; CfR; The East is Rising, the West is Declining {东升西降}) is much a discourse that China only wants to export its labour, that China only wants to grab the world’s resources, etc., and is engaged in debt diplomacy suppressing emerging economies in their development endeavours. The Johns Hopkins University’s China-Africa Research Initiative website has exceedingly valuable statistics and reports and blogs about this matter; this site also has a discussion on the China Trap Diplomacy whereas PRC firms are being told to reduce their financial exposures in overseas jurisdictions that could move to seize assets; and there is a good roadmap since the seizures of Russian assets after the invasion of Ukraine; read  Counter Sanction Strategies that China Can Learn from Russia, Ding Yifan; Countering Western Sanctions, Yi Yan.

Looking at the chart below:

This chart actually plots Chinese credit, so it’s the debt of the rest of the world, the developing world, to China. And the chart on the left simply indicates the way in which debt owed to China has, of course, increased over the course of time as a result of Chinese development assistance and China’s lending, especially to parts of the Global South; read RISE OF CHINA AND DEMISE OF CAPITALIST WORLD ECONOMY.

One of the very striking things about China is that a large share of its lending is, in fact, to very low income countries. It lends more to the least developed countries in the world than do the multilateral institutions and do the OECD group.

If you see the least developed countries, their total debt to the rest of the world is 43% of their gross national income, which is, nearly one half, a very substantial share. Of that debt, the share owed to China is only 5.5%. And Chinese debt amounts to 12.8% of the total.

China’s share of GNI is 4.3%, and its share of the total debt of sub-Saharan Africa is 10%. So these claims about a debt trap are, in a sense, simply do not stand up empirically.

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